Standard & Poor's Corp. placed Philadelphia's CCC rating on Credit Watch with positive implications Friday, saying the city with the worst rating in the nation might soon earn its first upgrade in 16 years.

The announcement, which applies to $1.3 billion of outstanding debt, came in response to the Pennsylvania Legislature's approval last week of an oversight authority for the city. The authority plans to issue deficit bonds on behalf of Philadelphia, which has been shut out of the credit markets because of its junk-bond ratings.

Both Moody's Investors Service and Fitch Investors Service rate the city B.

Proceeds from the new authority's bond issue will be used to cover Philadelphia's $219 million deficit for fiscal 1991, as well as a $42 million hole in next year's budget, which Mayor W. Wilson Goode and the city council are still hammering out.

City Finance Director David Brenner said he was pleased with the news that Philadelphia might soon begin "the long hike back" from its ratings nightmare. Standard & Poor's cut its rating to below investment grade last September, when the city was unable to arrange its annual short-term note borrowing because of collapsing investor confidence.

"I realize [the Standard & Poor's action] is a marginal move, but we've seen a couple of positive developments recently that, hopefully, are suggesting that maybe the worst is behind us," Mr. Brenner said, referring to the approval of the authority and recent upgrades of water and sewer debt.

City officials warned in recent weeks that the city was on the verge of default, because there was no money to make large debt service payments due next month or a $133 million municipal pension fund payment due June 30.

An amendment to the legislation creating the authority allows the city to defer the pension fund payment until September, and the city now expects to make the debt service payments by arranging temporary financing from local lenders, secured by the promise of the upcoming bond proceeds.

Mr. Brenner said the bond proceeds might not be available until Labor Day, which would mean a temporary loan would be vital to the city's cash-flow needs over the next three months.

Richard Larkin, a managing director at Standard & Poor's, said selling the bonds will "bring the city back from the brink" and alleviate the immediate cash crisis.

While that would probably bring an improvement in its rating, Mr. Larking said the city would still remain speculative grade at least until the oversight authority had established a successful track record of operations.

Under the enabling legislation, the five-member board must approve a five-year fiscal recovery plan that city officials are still drafting. If the board determines the city is attempting to stray from the discipline of the plans, it is empowered to withhold state aid to the city, bond proceeds, and excess authority taxes not needed for debt service.

Part of the legislation approved last week also permits the city to levy a 1% local sales tax, which will be used to replace lost revenues from a portion of the city wage tax that will be diverted to back the bonds.

Michael Johnston, an assistant vice president and manager at Moody's, said the approval of the oversight authority could create an atmosphere for positive developments. But he said much will depend on "how much teeth" the authority is given when an "intergovernmental cooperation agreement" is signed between the city and the state in the next several weeks.

The last time Standard & Poor's upgraded Philadelphia's rating was in 1975 when the city moved to A from BBB.

In addition to acting on the city's $1.3 billion in general obligation debt, Standard & Poor's also laced $81.7 million of CCC-rated industrial development, parking authority, redevelopment authority, and transportation authority debt on CreditWatch with positive implications.

PHILADELPHIA: The Road

to Junk Bond Status

Rating Action Date

A upgraded (*) 7/15/75

A-minus downgraded 6/22/79

BBB-plus downgraded 7/10/89

BBB-minus downgraded 6/15/90

CCC downgraded 9/17/90

(*) from BBB.

Source: Standard & Poor's Corp.

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